Buy ONGC; target of RS 1025: CLSA

84640 Investors following ONGC. Share this News with them.

0

Like this story, share it with millions of investors on M3

Buy ONGC; target of RS 1025: CLSA

CLSA Research has recommended buy rating on ONGC with 12 months target price of Rs 1025.

Post your opinion here

 

0

Tweet

Share on Tumblr

RELATED NEWS Long term investors can hold UTV Software: Gaba Buy KPIT Cummins; target of Rs 172: Ask Securities Hold BHEL: ASK Securities Buy JP Associates; target of Rs 771: Prabhudas Lilladher Accumulate Inox Leisure: Edelweiss Research ALSO READ News and Notices about ONGC See interviews with ONGC Management See what other Experts & Brokerages are saying about ONGC See previous Results of ONGC ONGC BSE | NSE 25/05/12 Are Mutual Funds betting on ONGC?

CLSA Research has recommended buy rating on ONGC with 12 months target price of Rs 1025.

CLSA Research report on ONGC:

The impending 16% legacy gas price increase for ONGC from 2QFY08 is a mixed bag - while it positively impacts earnings, it also delays gas price deregulation till FY10 diluting the value of this embedded option. We are resetting our earnings estimates to factor this higher gas price (positive) as well as a stronger rupee (negative), stronger crude (positive) and higher and longer subsidy sharing (negative). The resultant effects cancel each other in FY08-09CL but we are more confident of upgrades now - especially if the rupee depreciates or the subsidy sharing for FY08 reverts back to the norm. Valuations remain undemanding. BUY. Building in higher crude; subsidies; rupee.

We recently upgraded our 2007-8 crude prices assumptions by USD 5-10/bbl and long term estimate to USD 55/bbl Brent. The subsidy burden on ONGC increases commensurately, however, offsetting some of the positive impact in FY08. In addition, we are now building in upstream subsidy sharing for FY09-10CL as well given indications from the government that it is not looking to alter the status quo in the foreseeable future. This lowers the profitability of legacy crude assets. However, the gains from ONGC's valued-added-products (VAP), JV crude assets and overseas ventures offsets this and would have led us to upgrade FY08-09CL estimates by 2-4%. We are now resetting our forecasts to a stronger rupee, however, (Rs 41 per USD in FY08, Rs 42.2 per USD in FY09-10CL) resulting in a 7-9% EPS downgrade.

ONGC Videsh is critical to overall profits

As our USD earnings upgrades would suggest, although domestic profits are de-linked from crude prices, ONGC is beginning to gain from a higher crude prices given the increasing salience of its overseas assets. We are especially encouraged by recent tenders of Sakhalin-I's Sokol crude which has fetched USD 7-8/bbl premiums to Oman/Dubai translating to USD 2-4/bbl premiums over Brent. ONGC Videsh (OVL) would form 13-22% of overall EPS and it would be welcome to have greater and more frequent disclosure of financial and operating parameters. A more confident understanding of OVL will also help unlock full value (+Rs 67 per share).

Gas price increase to USD 2.3/mmbtu is a mixed bag

We are also including the impact of the impending 16% increase in ONGC's legacy gas price to Rs 3710/mscm (USD 2.3/mmbtu) from 2QFY08 as suggested by the Tariff Commission. There is room for a further 10% increase to Rs 4081/mscm if the government acquiesces but we view either outcome as a mixed bag for ONGC - while it adds 2-4% to EPS (a further 2% under Rs 4081 per mscm) and upgrades our fair value estimate by 2.5% to Rs 1025 per share, it also dilutes the value of the embedded gas price deregulation option (Rs 130 per share).

Valuations are undemanding

The cumulative effects on earnings from higher gas prices (positive), a stronger rupee (negative), stronger crude (positive) and higher and longer subsidy sharing (negative) largely cancel out each other in FY08-09CL but we are more confident of upgrades now - especially if the rupee depreciates and the subsidy sharing for FY08 reverts back to the norm. Valuations are undemanding. BUY.